Friday, 17th of April 2020
“But what does it mean, the plague? It’s life, that’s all”
– Albert Camus
________________________________________
Markets fell off a cliff last month as panic over the spread of covid-19 sparked a vicious cycle of portfolio deleveraging and the biggest correction in risk assets since the Global Financial Crisis. The pace of the sell-off and the accompanying price volatility was unprecedented: the full -34% peak-to-trough move in the S&P 500 Index took place in just 23 trading days after the 19th of February close. Intraday moves regularly eclipsed those seen in previous bear markets and were reminiscent of the worst trading days of the Great Depression. However, the rally since the 23rd of March (when the benchmark US equity index closed with a measly 2200 handle) has been equally extraordinary. Despite the global economic destruction being wrought by this virus and the draconian measures introduced by governments around the world to halt its spread, the S&P 500 Index is now in bull market territory having risen 25% from the trough (as of Thursday’s close). Moreover, US equities are hardly an outlier in this regard – the German DAX, Australian S&P/ASX 200, Canadian S&P/TSX Composite, Korean KOSPI, and Brazilian IBOVESPA are all up >20% as well. Incredibly, the tech-heavy NASDAQ 100 Index is now positive for the year. Coronavirus be damned! To be sure, many quality assets still trade well below intrinsic value in both public and private markets, and the Fed Put is alive and well with the US central bank ready to increase asset purchases whenever the market collides with reality and does not rapidly re-establish a positive trend. On that last point, the Fed announced this week that it would consider the purchase of HY ETFs and so-called ‘fallen angels’ (i.e., IG issues downgraded to junk amid the crisis) for the first time! Nevertheless, market rallies like the one we have seen in the past three weeks cannot last forever. We suggest that you roll or re-establish your hedges now, particularly while the VIX (i.e., the S&P 500 volatility index) is below 40 for the first time since the 5th of March.
Other than by a massive synchronised fiscal and monetary stimulus, the recovery is being driven by the perception that the rate of new coronavirus infections is now slowing in most large developed markets. Governments in Germany, Italy, Spain, the US, South Korea, France, and Singapore, among others, have all declared that their country is past its respective peak, and this has buoyed market sentiment and caused risk premia to compress. However, whether countries are able to exit economically harmful lockdown measures while avoiding a second wave of cases will soon be the focus of investor attention. And there is plenty of room for countries to make colossal mistakes. The ingredients for success appear to be a staggered approach to lifting restrictions, continued social distancing in some areas of life (and until 2022 without treatments according to one new Harvard study), aggressive contact-tracing for all new cases of covid-19, and mass testing for antibodies to identify levels of ‘herd immunity’.
President Trump has released new guidelines on easing measures in the US, describing 29 states as in the ‘ballgame’ to re-open. For a state to consider lifting restrictions, his administration recommends that there first be a downwards trend in suspected cases for at least a fortnight. The state would then begin a three-phase process in which restrictions progressively eased every two weeks so long as case numbers continue to fall. In phase one, sports stadiums and restaurants would re-open, while schools and bars would have to wait for phase two. Needless to say, the Donald has been forced to backtrack on his initial claim that it was up to him alone when states re-open, and New York and New Jersey have already chosen to extend their lockdowns until mid-May (despite both being close to, if not past, their peaks). Nevertheless, investors can now expect some states to move towards the exit in the coming days and weeks. Other countries that have announced plans to loosen restrictions soon (or have done so already) include Germany, Poland, Mexico, Denmark, Italy, Switzerland, South Korea, China, and Austria. If these efforts prove successful, growth could begin to bounce back during Q2. That said, some countries including the UK, Portugal, and France have chosen to extend lockdown measures that were due to expire, while Japan has moved to a national state of emergency, Singapore has re-introduced restrictions after an outbreak of the virus among migrant workers, and Russia has postponed its 75th anniversary WWII victory parade. The road to global economic recovery will be long and bumpy.
On Tuesday, the IMF revised its economic forecasts for 2020 and warned that it now expects the global economy to contract by -3.0% this year, experiencing the worst recession since the 1930s. The US and the Eurozone are expected to shrink by -5.9% and -7.5%, respectively, with the latter region the hardest hit globally. Italy and Spain are expected to be the worst performing major economies with GDP down -9.1% and -8.0%, while only India (+1.9%) and China (+1.2%) are expected to see positive growth. The IMF also suggested that Asian economic growth will come to a halt for the first time in 60 years. Rapid Chinese expansion is the bedrock of the regional economy and even during the 1997 Asian financial crisis China’s meteoric rise more than offset the damage to SEA countries. Today, however, Chinese (and Indian) GDP growth cannot offset the damage elsewhere: recessions in Japan (-5.2%), Australia (-6.7%), South Korea (-1.2%), and in SEA will be too great. Given these stark forecasts for global growth is it any wonder that the OPEC+ resolution, struck on Sunday, to cut oil production by 9.7m bpd failed to lift the oil price? Reduced demand will easily offset reduced supply unless and until major economies exit lockdown over the course of Q2 (at which point oil could be primed to move higher at speed).
New economic data released this week support the theory that global growth will be abysmal this year. In China, where the economy is expected to rebound fastest and +6.0% growth is seen as disappointing, Q1 GDP has come in at -6.8% YoY, Q1 retail sales have fallen -15.8% YoY, and fixed asset investment for the quarter is down -16.1% YoY. In the US, meanwhile, another 5m people claimed unemployment benefit for the first-time last week, bringing the total number of jobs lost to the coronavirus to 22m. At this rate, a US unemployment rate touching 20% before the lockdown is lifted is highly likely. In the UK, data from the Office for National Statistics (ONS) suggests that 25% of businesses have closed down while the virus rages and that if the lockdown lasts 3 months (a bearish case) then UK GDP will fall by an astonishing -35% in Q2 and the fiscal deficit will increase to 14% of GDP for the year. For the UK, moreover, we still have the Brexit negotiations to look forward to later in the year. These are likely to get progressively more fractious as we approach the December deadline as both sides try to score last minute concessions by hanging tough. (That said, given the hit the economy has already taken due to the coronavirus, any damage from a ‘no deal’ Brexit looks like rather small potatoes…)
On the continent, French Finance Minister Bruno Le Maire has suggested that the government’s central scenario is for the economy to shrink by -8.0% this year and for the deficit to hit 9% of GDP. This would bring France into line with what the IMF predicts for Italy and Spain (the worst affected economies) and would sharpen North/South divisions over EU-wide relief measures. Recovering from a crisis this severe is a gargantuan task and will take time. The notable absence of the EU from frontline decisions has not gone unnoticed and the EU Commission President’s ‘heartful apology’ is thin gruel for Southern states that the block has failed again. Longer-term the crisis will increase the risk that the Eurozone fractures; indeed, peripheral sovereign spreads have already begun to widen as investors mull this possibility (as well as the consequences of the increased debt burden from fighting the virus). The pandemic is also likely to accelerate the de-globalisation of supply chains. In the UK, for example, a lack of the necessary reagents to create covid-19 test kits has been blamed on the absence of a scalable onshore medical diagnostics industry. It turns out this is something you need when your trade partners are hoarding tests amid a global healthcare crisis, and cross-border trade is based on ‘just-in-time’ delivery so you have no domestic inventory! Are the marginal benefits that come from removing all non-tariff barriers as part of a thick free trade deal worth more than the option to retain some (‘uneconomic’) onshore production in strategic industries? The world to come will be different.
In April's news roundup, we look at some of the key movements and purchases including the return of US investment into the London real estate market to a ten-year high of £2 billion in Q1 2024. We also highlight some recent institutional office acquisitions in London.
In this article Neil Benjelloun, Bedrock’s Head of Private Markets, sheds some light on the growth of VC-funded purpose-driven businesses in solving the world's most pressing challenges. Sharing key insights and takeaways from a live Q&A session he hosted with Cameron McLain, Co-Founder and Managing Partner of Giant Ventures.
It is common to see members of the next generation in their 30s occupy a seat on the board of directors. This is desirable as it’s a very important interaction point with the business or the family’s assets, where they learn about strategy and create the family’s vision for the future. But as with most things, there is a good and a bad way to go about it. In this article, Maria Villax, Head of Family Strategy & Governance at Bedrock explores how next gens can prepare for a seat on the board.